Continuing on from our previous blog on political risk, voluntary carbon market (VCM) participants navigate growing risks that greatly impact project success and viability. Among these risks include invalidation risk, reputational risk, price risk, non-delivery risk, reversal risk and counterparty risk.
One major concern for the aviation industry is revocation risk under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Revocation occurs when credits that were once authorised by a host country as part of a compliance program are later deemed invalid or double-counted. This risk is particularly troubling for airlines participating in CORSIA, as credits purchased to offset emissions could be disqualified if the host country also counts them toward its Nationally Determined Contributions (NDCs). Such a scenario results in what is known as double-claiming, a violation of the integrity standards within CORSIA’s framework.
The risk of an undersupply of eligible carbon credits is particularly pronounced within CORSIA’s First Phase compliance period (2024 - 2026). If there are no new Letters of Authorization (LoAs) for authorised projects, and if ICAO (International Civil Aviation Organization) doesn't issue fresh approvals, the forecasted supply of CORSIA-eligible emission units (EEUs) stands at just 34 million tCO2e. This amount falls short of meeting even the lowest demand scenario for the first phase, which ranges from 50 million tCO2e in a low-emissions case to 230 million tCO2e in a high-emissions scenario.
In our CORSIA report, the International Emissions Trading Association (IETA) highlighted the challenges: “The shortage of new LoAs represents a significant barrier to increasing supply,” while IATA emphasises that delayed issuance of LoAs by host countries is “constraining the supply of EEUs” and posing challenges to both airlines and carbon markets. With CORSIA’s expiration slated for 2035, unless ICAO extends the program, the urgency to resolve these bottlenecks continues to grow.
As stakeholders develop their Article 6 and CORSIA strategies, there are rising concerns among buyers regarding the risk of revocation of credits which were committed to being correspondingly adjusted. If authorised mitigation outcomes are not correctly reported to the UNFCCC, they risk being double-claimed by two entities (eg. Host countries and airlines participating in CORSIA First Phase), and these risks can arise due to delays in the reporting by host countries.
Under CORSIA, the risk of the authorisation of EEUs being revoked by host countries means emission reductions will be double-claimed, and the loss of initial investments. Project developers and registries are then liable to cover investment losses, and are looking to insurance providers to help underwrite these risks. For more detailed information on these risks, we encourage stakeholders to review Oka’s webinar on ‘Navigating CORSIA’, which can be found here.
To support stakeholders in the market, we have devised a risk scoring metric which assesses the steps taken by stakeholders to mitigate non-delivery risk from revocations. The score is an equally weighted composite which combines country political stability index scores (out of 100) with ten indicators across three broader categories: insurance clarity (out of 30), registry mitigation risk score (out of 20), and country regulation risk (out of 50). Where combined scores (out of 200) are higher, this suggests higher insurability, political certainty and stakeholder alignment towards protecting investments in CORSIA first phase eligible credits from revocation.
We began the assessment by asking a number of questions under each of the categories. These questions are given a true/false flag and assigned a score (10 for True, and 0 for False or missing).
LoA Risk Score sample. Scoring thresholds do not represent final thresholds
At present, there are 49 unilaterally authorised project activities under 16 distinct Letters of Authorisation (LoAs) which have authorised issuances listed on registries Gold Standard Impact Registry (GS), Verified Carbon Standard (VCS), Architecture for TREEs (ART). We have assigned LoA Risk Grades to all of these projects in this first iteration, and in the second will apply them to all projects which are categorised as Approved and Conditionally Approved for CORSIA First Phase (2024-2026 compliance period). These include projects from ACR, Architecture for REDD+ Transactions (ART), Gold Standard Impact Registry (GS), Global Carbon Council (GCC), Verified Carbon Standard (VCS).